July 18 (Bloomberg) -- Google Inc. and Microsoft Corp. slid in Nasdaq trading after reporting profit below analysts' estimates, signaling that the slowing economy may be weighing on demand for computer-related products.

Google fell $42.94, or 8 percent, to $490.50 at 9:42 a.m. New York time on the Nasdaq Stock Market, the biggest drop since Feb. 1. Microsoft declined $1.44, or 5.2 percent, to $26.08, the most since April 25.

The results raise concern that customers are curbing spending in the online ad market, dominated by Google, and the software industry, ruled by Microsoft. Google Chief Executive Officer Eric Schmidt said his company faces ``a more challenging economic environment'' for the first time, a sign investors can't use technology as a haven from the battered housing and financial-services markets.

``You can't consider technology a defensive sector at all,'' said Jerome Dodson, chief executive officer of San Francisco- based Parnassus Investments, which oversees $1.4 billion in assets, including Google and Microsoft shares. ``We're going to have a small sell-off in technology.''

Google reported a slowdown in the growth of consumers clicking on Web ads and higher-than-expected research and legal expenses, while Microsoft forecast sales and profit that missed analysts' estimates.

`Mixed Bag'

Some technology companies -- such as Intel Corp. and International Business Machines Corp., which get a majority of revenue outside the U.S. -- posted results this week that topped estimates. Still, shares of both companies fell in extended trading yesterday, dragged down by Google and Microsoft.

``Earnings in tech have clearly been a mixed bag,'' said Charles Heath, an equity analyst at UMB Financial Corp. in Kansas City, Missouri. ``It looks like software companies in particular are the ones that could be more vulnerable to the weakness'' in the economy.

Google, owner of the most popular Internet search engine, attributes about half its revenue to the U.S. Excluding costs such as stock-based compensation, second-quarter profit amounted to $4.63 a share, trailing the $4.73 average of estimates compiled by Bloomberg.

Advertisers pay Google when consumers click on text links that appear next to search results. Clicks on those ads climbed 19 percent, decelerating from growth of 47 percent in the year- earlier period, the Mountain View, California-based company said.

`Incorrect Assumption'

``Google's management finally admitted that the economic slowdown will impact its business,'' Stanford Group Co. analyst Clayton Moran told Bloomberg Radio today. ``Some people assumed Google was immune to an advertising slowdown. That was just an incorrect assumption.'' Moran, who is based in Boca Raton, Florida, advises investors to hold Google shares.

Google's research spending climbed 65 percent, eating into profit. General and administrative expenses rose 49 percent to $475 million, in part because of costs to fight a lawsuit that Viacom Inc. filed against Google's YouTube unit.

Microsoft, based in Redmond, Washington, gets about 60 percent of revenue from the U.S. The company's fourth-quarter net income rose 42 percent to $4.3 billion, or 46 cents a share. Analysts had predicted 47 cents, according to a Bloomberg survey.

Sales of Microsoft's Office programs missed the company's goals for a second straight quarter amid slackening demand and high piracy rates in countries such as China. Microsoft's Internet advertising also fell short of its targets as it lost business to Google. Overseas growth outpaced its U.S. sales.

`Under Pressure'

``For any U.S. company, the domestic part of their products are going to come under pressure,'' said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman & Co. in New York. ``The U.S. consumer is getting pinched.''

Microsoft cut 1 cent from its forecast for the fiscal year that started this month, saying profit will be as little as $2.12 a share. Sales will be $67.3 billion to $68.1 billion. Analysts' estimates averaged out to a profit of $2.17 and sales of $67.4 billion.

IBM, based in Armonk, New York, relies less on the U.S., with the country accounting for about 37 percent of its sales. The company reported a 22 percent increase in profit for the second quarter, with earnings of $1.98 a share and sales of $26.8 billion. Analysts had anticipated profit of $1.80 and $25.9 billion in revenue.

Outside the U.S.

``The most growth and opportunities for IBM lie in its services and its sales outside the U.S.,'' Eugene Zakharov, an analyst with Technology Business Research Inc. in Hampton, New Hampshire, said in an interview. ``A lot of the growth this quarter came from Europe, the Middle East and Africa, where Microsoft and Google do not have a large presence.''

IBM raised its full-year forecast to at least $8.75 a share from $8.50. Nine analysts in the Bloomberg survey had predicted 2008 earnings of $8.54 on average.

Intel, based in Santa Clara, California, said earlier this week that second-quarter profit rose 25 percent on global demand for personal-computer processors. The company gets about 16 percent of its revenue from the U.S.

Advanced Micro Devices Inc., Intel's largest competitor in computer processors, blamed ``challenging macroeconomic conditions'' for a wider second-quarter loss yesterday. Sales fell short of analysts' projections.

AMD's second-quarter net loss expanded to $1.19 billion, or $1.96 a share, from $600 million, or $1.09, a year earlier. Sales at the Sunnyvale, California-based company climbed 3.1 percent to $1.35 billion.

AMD CEO Hector Ruiz resigned after the chipmaker reported the seventh straight quarterly loss, passing the reins to Chief Operating Officer Dirk Meyer. Ruiz will continue as chairman.

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